Video Game Devs Category
I get at least 2-3 emails a day asking this question one way or another. I figured I could provide a primer in order to do this.
What would be some reasons a foreign company would want to set up shop in the US?
- Better Taxes – The US currently has a maximum 35% on net income earned in the United States. Even lower on the first $50,000 at 15%
- More exposure – Some companies need to set up shop in the US in order to manufacture product here, sell on Amazon US, use US based services like Stripe, as well as carry their product in US stores. Some video game developers would prefer to have a better tax situation when selling on Steam, or Xbox Live. Regardless, the extra exposure from having a “US based” company will sometimes far outweigh the costs to do it.
- Freedom from VAT tax – In the US, you can set up your company in a sales tax free state, and not pay any VAT or Sales tax on sales of products or services
Before I dive deep into this, I want to point out that this is not an inexpensive process, at minimum it will cost around $1,500 to do with a yearly cost of at least $600-700. And that is the minimum. The main reason for this is the legal help that is necessary to set up some of these items (which is unavoidable) as well as the mandatory yearly tax and franchise filings.
OK, first things first:
1) You need a US C-corporation
The reason you will need a C-corporation rather than an LLC (aka partnership) is a that an LLC is usually treated as a “pass-through” entity. This can cause issues if your company in the US makes net income and is required to pass that through to you as an owner in another country. By doing this the The LLC (aka partnership) makes this whole concept of “tax savings” not applicable because you are eventually going to pay tax on any net income from the US in your country.
With that said, if you live in a country with a tax treaty with the US see here, then you can potentially open an LLC and allow that net income to pass through to you in your country and NOT be double taxed. If you are not looking for the tax savings, and you are in a tax treaty country, then it may actually make sense to set up an LLC rather then a C-corp, though this will be rare.
Delaware used to be the place to set up a C-corp or LLC easily, though with increased fees, I find that MONTANA is the best state to set up a C-corp or LLC. This usually costs ~$500 plus $100 per year for a registered agent and annual filing (Delaware is $800 and $300 per year). This process will get you Bylaws, and EIN (business ID number) and Articles of Incorporation.
2) You need a bank account
This is a difficult one, and can take the most time. In order to open a business bank account in the US you need:
- a) A registred company, EIN number, and Bylaws that include a corporate resolution
- b) An officer of the company with a Tax ID number (TIN or SSN)*
- c) A US based address
* I want to note, that I have heard of some banks which have locations in the foreign country and in the US to allow you to set up a US based account without needing to get a tax ID number. I do not know these banks.
a) Setting up your C-corp was accomplished in step 1
b) Getting a Tax ID number can be difficult. It must be applied for in a W9 application. You must provide identity and a reason for your application. You can find more about that here. This process can take up to 5 months, so proper planning is absolutely necessary. With the help of a professional, this can cost at minimum $800.
c) A US based address should be easy to get, lots of companies provide mail forwarding services (including me).
3) You need to do all the proper yearly filings as well as the management of the US based finances
This usually requires the help of a professional.
- You must file an annual company report with the state and pay any franchise taxes (cost: Montana it is $20)
- You must pay a registered agent for your company (this cannot be done by me)(cost: $100 per year)
- You must file a federal tax return (cost: $500+)
- You must create company minutes detailing an annual meeting of shareholders(cost: none)
- Annual tax planning – if your company makes income, it may be smart to plan with a professional the tax implications
- Monthly bookkeeping – a professional can help you with this, but it can be done on your own
4) Any money that is transferred from the US to you or your company in your foreign country is either considered a Dividend distribution, or payment for services performed. Both are most likely taxable in your country.
There is is! Hopefully that helps, I will try and periodically update this with better and more detailed information.
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UPDATE 7/23/14: I have recently been informed that steam has figured out some fast track way to get a EIN and W8-Ben. I have not confirmed this, but here is their website with instructions in case you are interested in trying their way: Here I had always thought that you needed an ITIN or SSN in order to get an EIN, because you must provide a “responsible party” but according to them you do not. I will keep checking on this.
It was recently brought to my attention that Xbox and Steam Indie Game Developers who are considered to be “non-resident aliens”, in other words foreigners living in another country without US citizenship, have been having trouble getting paid for their royalties through Microsoft.
After reviewing the site, I can see why, Microsoft provides no legal advice to game devs, and strictly forbids it in their forums. Steam actually has a really good FAQ HERE. Being able to wrap your head around getting an ITIN, applying for zero withholding due to tax treaty status, and dealing with the IRS can be very challenging.
I hope to clear this up for those people.
In order to get paid from Microsoft and you are a non-resident without US citizenship, you must:
1) Have or get an ITIN (W7) or EIN (SS-4)
2) Submit a form W8-BEN
Seems simple, right? Well there is a lot of tricky information on these forms. Also, I read in a couple areas of the Forum that people simply got an EIN number. That would be impossible without an ITIN or SS#, so I am not sure how they were able to do that. My advice is to not listen to them, and proceed with an ITIN.
First I have filled out a W7 based on the way that most people would use them:
The assumption in that form is that your country falls into a “tax treaty” zone. See this page Table 1, Column 12 – Copyright Royalties, Other, and Footnotes). If your country has a 0 in that field you are in a tax treaty country. If you are not in a tax treaty country, the US will unfortunately withhold your money and you must file a US tax return. I can touch on that in a later post.
IRS Publication 901 (All Countries) – http://www.irs.gov/pub/irs-pdf/p901.pdf
For the section of the W7 (section H) that requires your country’s article number. You can find that here:
Search for your country, click on it, find “income tax treaty”, click on it, find “Royalties”, notate the article number on the W7
You must include identification with the W7 when you mail it in. As if November 2013 you will have to mail in the original passport. I would recommend using a courier so they do not lose the passport. You will get the passport back, the US is pretty good about that.
Alternatively, the IRS will accept other forms of identity. You must submit two forms of ID from the list. One must have your picture on it.
- Birth Certificate
- Drivers License
- Military ID Card
- Foreign Voter Card
In addition to the ID, you must include the letter from Microsoft or Steam. I have not seen this letter, but the requirement are:
“A signed letter or document from the withholding agent, on official letterhead, showing your name and verifying that an ITIN is required to make distributions to you during the current tax year that are subject to IRS information reporting or federal tax withholding.”
Steam has those letters here.
Next is the W8-Ben. Almost every one of you will submit this version. If you question this, see a tax professional.
Follow the instructions that I put on the form. This one is pretty simple, pretty much every one of you will use the same information.
A couple of notes:
- Make sure you use the exact same name for your Microsoft account that you use with your W7 and W8.
- If you are confused with the information that I provide, you must seek the help of a tax professional. This information is set up to be a guide and not meant to be specific to you and your situation. It is not meant as direct legal advice and I cannot be held responsible for the use of this information.
- I realize this process is difficult, but look at the bright side, once you are done with it, you never have to do it again!
- I will keep brainstorming alternatives, but it seems right now that this way is the least expensive way of doing it. Email if you are willing to bypass all of this and are willing to pay $500 to set up a corporation in the US. I may add to this post if enough people are interested.
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A question that I get a lot is what I have actually saved companies for providing my three favorite tax incentives.
I will use a mid-sized company as an example. This is a company that makes between 1- 6 million in revenue each year.
Items to be Included: Typical wages and contractor expenses. If the company takes my advice for computer leasing and internal software use. Use of supplies, and segregation of administration duties.
NOTE: (If none of the above makes sense, please let me know, I will write a post on it if enough people want to know).
I can usually save a ~3 million dollar per year (revenue) company:
- $200,000-300,000 in R&D credits (based on wages, patents, trademarks, supplies, etc)
- $9,000-18,000 in Domestic Production Activities
- $200,000 in California Enterprise Zone (other states have enterprise zones too at different rates of course: NY, VA, FL are just a few)
Total: $409,000 in taxes… not too bad. and all of that is carried forward to future years if not used in that particular year.
Contact me if you would like to learn more
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I have been getting this question more and more. Indie video game devs have one thing in mind, and that is making a great game. The last thing they want to think about is financials and taxes. But in this age of Kickstarter and Pre-order sales, they find themselves in a position where they do have to worry a lot earlier then expected.
My advice for Indie Devs:
1. Don’t sweat the entity
Don’t worry about starting an LLC or Corp until you are, or about to make money on your game(s). It is something that can be set up easily and efficiently. Also, many game devs get the wrong entity. For most devs, I highly recommend an S-corp, they are relatively flexible, have common shares (for shareholders and potential investors), and provide a great tax benefit. An LLC can actually act like and S-corp, so dont sweat it if you already set one up, though the cost to legally set up a proper operating agreement may increase. The only time I would recommend setting up an entity right away is if you have partners involved in your project (see more below).
(Advanced: If you have, or plan to have investors, even just family members this may get a little bit complicated. Legally, and technically you need to stipulate this in your bylaws, Org Agreement or articles, if you are eventually going to have a corporation (or LLC).)
2. Keep track of your expenses
Open a separate bank account, they are usually free, it will completely separate your business related expenses to your personal ones. This way, you wont need to save every darn receipt that you get, you can simply refer to the bank statement. Remember, it is important that you track your expenses, every payment that is business related should come from your business account. This can pay off for you in the future if you ever choose to use tax incentives. It is also good practice.
3. A Video Game is your Asset
I should be telling you to protect your game with trademarks, copyrights, patents, guard dogs, etc. But this is complete overkill. You should have a nearly finished product before considering this. Unfortunately, you are an indie game developer, if someone wanted to steal ideas from you, your power to hire a good attorney is limited. On the other hand, and THIS IS IMPORTANT, have people involved sign NDAs and Independent contractor (IC) agreements AND keep your code safe. NDA and IC templates are available for free all over the internet. When you get ready to release your game, and you are confident it will sell, consider a trademark for your game and company name, the extra cost may save you a headache.
4. If you have “partners” get a partnership agreement (or by-laws for an S-corp, Organization agreement for an LLC)
I cant stress this one enough. Just a simple agreement saying who is entitled to what profits at what percentages. As long as it is in writing, there is no argument against it. Establishing a basis in a partnership (or S-corporation) is important as well, this is a value that is due to you if you are kicked out or the partnership (or S-corp) is sold. If you put your own personal money into the business via investment, this increases your basis. By having an agreement in place, it will protect you.
Note: Some states require you to register a partnership (CA is one of them). An LLC with more than one member is automatically classified as a partnership, no additional registration is required.
Regardless if you are good friends or family, it is smart to set this up right away. The cost is worth it. There are a lot of standard partnership agreements (and Operating agreements for LLCs) online, but I would highly recommend you get a professional to help write one as there is always custom information that needs to be put in there.
5. Once the cash is rolling in, get a professional Note:*not all professionals are good
This is the kicker, hire a good CPA. Hopefully one that has experience in the gaming industry. They should know about the Research Credit, any local credits, and the Domestic Production Activity Deduction. If they don’t know about those simple things, then find another. Just those simple tax incentives can save you thousands if your game ever takes off. They should also be able to provide you with strategies that translate to you personally (to better your financial situation far into the future).
Not all professionals are good, there are a lot of them who really just dont care and are only in the business for the money, I know because I run into them everyday. Try your best to spot those types. Ask a lot of questions, because if they really care and they will be truly interested in growing with your company. Find CPAs that give free consultations meet with a few of them, it will pay off for you and your Indie Dev Team.
Best of Luck!!!
Note: This list may expand – I am constantly getting asked this question, and I think of new important issues all the time.
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How can a foreign person, not living in (or near) the united states, start and run a Kickstarter Campaign? Here are the basics of how it can be done:
There are many requirements to start a Kickstarter Campaign. Two big ones are to have a US Entity (LLC or Corp) or Social Security number, a US resident, and a US bank account. These two requirements alone would deter quite a few foreigners from trying, you would need someone you knew and trusted in the US to handle that for you. Even then, that person could face tax consequences for running that bank account for you if it is not properly planned (I will cover this in a later post). This leaves very few options to set one up.
A Difficult, but effective solution:
1. First things first, I had to start a corporation so that the foreigner(s) would be the sole shareholder(s): A Delaware Corp is a great idea, they are cheap, provide excellent legal protection, and have a small Franchise Fee for share holders (Typically $225). I can set these up for $550 with a 48 hour rush ($500 without), highly recommended for time constraints of setting up Amazon Payments. I highly recommend you DONT use any of the silly websites that charge you to set up the corporation, they typically charge a mark-up and sometimes yearly fee, most of them do not allow the rush either.
2. Second, I apply for an EIN number - This one is pretty simple and can be done once the Corporation is in place. If you already have a SS# or ITIN you can get an EIN here
3. Next step is to Get a US resident to be part of your team as a “Creator” or “Developer”. This is the tough part. If you are trying to run a Kickstarter campaign, you need to have one. Amazon Payments needs to confirm that your company name listed on the bank account is associated with your US address. Kickstarter also requires this in their own version of verification. The US helper must be available to use their name for Kickstarter. They must be considered a key “creator” in your team. You, as the foreigner can still hold signer privileges on the bank account, but it may be difficult – see below 4. After you get a helper, you need a US based Checking Account To set up a bank account without my help, you need:
- A tax ID number registered with the IRS. You can get one by filling out and mailing in this form: http://www.irs.gov/pub/irs-pdf/fw7.pdf You will need to provide a Notarized copy of your passport.
- Once you get that, find a bank that is located in the US, that has a branch in your country. You must be able to go there in person to set up your signature account. Use your ITIN and EIN number to open the account. Your helper in the US may need to provide documentation supporting this information to a local location. You MUST have a US address on the bank statement, but it can be managed online by you as a foreign person.
- Some banks such as wells fargo allow a notarized copy of the application and ID to be sent courier as long as your US helper is involved and in person at the bank when the account is set up.
- I have also heard that some foreign banks, who also have a presence in the US will help you set up a US account without the need for a US helper. I am not sure which banks offer this though.
- You can have a friend or family member that you trust who lives in the USA (with a SSN) open up a checking account and be an authorized signer on the account for your business.
5. After this process, you may ask: Can I get taxed in the USA for Kickstarter Funds? The easiest answer is a small portion of your funds will need to be taxed in the US order to legally run the Kickstarter Campaign. Your foreign company must eventually “pay” the US company for providing the service to run the Kickstarter Campaign for them. I would say a good safe number would be 1-3% of the Kickstarter proceeds for services. They must reflect the market value of the work that it took to complete the whole process. That 1-3% will be taxed in the US at the corporate income tax rate, then whatever is left over can be issued as a liquidating dividend to your foreign company, and taxed in your country appropriately. The amount that your company eventually received from the Kickstarter Campaign should be taxed in your country depending upon your countries tax laws.
Its a difficult process, and with Kickstarter’s tight guidelines, its a risk to do all of that work and find out that your projects does not meet those guidelines. Indiegogo, which offer the exact same service allows pretty much anyone to run a campaign.
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And if your CPA says otherwise, fire them. I have seen two articles already where a Kickstarter video game project says they had to pay taxes on their left over money in their first year, this makes me sad, because you can easily avoid that.
NOTE: There has been some confusion on this article where people seem to think I am suggesting you avoid or evade taxes. That is NOT the case at all. These methods used are 100% legal ways to reduce or postpone taxes paid. I want to be very clear: ALL OF THESE METHODS are 100% legal and are in no way avoiding or evading taxes.
In order to eliminate taxes all together there is a simple accounting rule and election of income that you can use, if that fail (which it wont 99% of the time), then there are a few more complex methods that can not only reduce the tax, but can set yourself up to have a tax benefit to carry over to future years, and should probably be used regardless of your situation.
I will start with the first and most simple method:
Accrual accounting is an election that is made on a tax return that allows you to claim income when it is earned, rather than when it is received. This means that every video game company (or many others) out there who get Kickstarter funds would not have to pay taxes on those advanced payments until the game is actually made and distributed to those individuals who pre-purchased it.
Going further, let’s just assume that you have given away items such as T-shirts, artwork, and prizes that you distribute to your backers the first year. You would have to include in income up to cost (or fair market value) of those items on your tax return, because technically you did provide a portion of the service and some of that income was technically “earned”. Therefore, you will be responsible for some of the income earned. What’s important to note, is that you will easily be able to offset that income “earned” with the first year’s expenses or the cost of those items (t-shirts, art, etc.).
Simply electing the accrual accounting system is not enough in itself (which anyone can do including individuals, LLCs, Corps), the IRS still requires a special election to classify the income. If that election is not made, the income falls under the rules set in publication 538 (passage in quotes below) and you do not get any benefit from the accrual election, further, you must use the instructions in pub 538 to properly elect the classification on your tax return in order to make that income an “advanced payment”:
“You report an amount in your gross income on the earliest of the following dates.
- *When you receive payment.
- When the income amount is due to you.
- When you earn the income.
- When title has passed.”
It is important to properly elect to classify this income. I highly recommend a professional handle this for you, as it is easy for someone untrained in taxes to make a mistake with this election. The key to this is to talk to many professionals and ask them if they understand these concepts, as I have seen over and over, most professional do not.
Other Tax Savings Tactics:
Research and Development tax credit
This one I write about all the time, and if you are a video game dev and your accountant has not offered this to you, fire them right now, the benefits are tremendous and could potentially eliminate taxes on income generated from both Kickstarter and sales to the general public. The credit requires some heavy analysis. My firm and many others will not charge until the benefit is used, so it makes complete sense for you to utilize it.
Domestic Production Activity Deduction
This deduction was created in 2004 and was meant to be geared toward the manufacturing industry, then the attorneys over at Electronic Arts successfully lobbied congress and extended it to software and video games. This deduction is 9% of net income, which is an incredible tax break that nearly nobody knows about. For someone that has a net income of $100,000 can easily write off $9,000 as an additional deduction, potentially getting up to $3,000 back in taxes. There are many other requirements to elect this deductions, so again, I advise you to consult a professional with experience utilizing this deduction, not all of them have this skill.
Updated 4/19/2013 with additional information, fleshing out the concepts
Again, this article is only meant as informational, many individuals and companies have unique situations, I recommend you consult a professional before applying any of the above information.
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This article says it all. EA taking advantage of the exact tax incentives that I offer analysis for.
It doesn’t take a team of accountants to save money in taxes
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Aside from the intrinsic value of having local contractors that are easily accessible and speak the same language, there is a value of keeping your contractors that you hire local and in the US.
There are tax incentives in place for keeping production activity in the US, and in some cases may offset the up front savings of looking for contract work overseas.
The R&D tax credit and the domestic production deduction can offset a companies tax liabilty by enough to make it worth it. An example of a small video game developer below:
Over three years of development the video game developer accrues:
- $200,000 domestic wages
- $60,000 contractor 1099 expenses (foreign and/or domestic)
- $10,000 in computer leasing expense
The company releases its video game and earns $500,000
Typically the tax bill would be $175,000 for someone who has no accounting system in place, but lets assume they understand a basic accounting and deduct the expenses based on accrual system. this leaves them with a tax bill of around $70,000.
Assuming the contractors hired were outside the US, and Utilizing the R&D credit and domestic production deduction on all other activities, they are left with a $40,000 tax bill
If the contract work was completed by someone IN the US, the tax bill would be $8,000 less at $32,000.
In this situation, if the company chose to pay contractors within the US, they would have saved $8,000. The bottom line is companies should take this into consideration before thinking about how much they save by hiring overseas.
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Video game devs have it good when it comes to taxes, a properly set up system in place could save them thousands and sometimes let them pay as little as 1-2% in taxes. With the basics in place, the Research and Development tax credit, and the domestic production deduction can put that nail in the coffin to nearly eliminate any tax burden once the game is released. Not only that, but many states offer their own Research Credit AND Enterprise Zone Credits (I count those as one).
Results truly vary based on the developer because of the use of their expenses. But the bottom line is that 100% of indie devs can take advantage of at least one type of incentive.
In my experience, Sadly, very few use a professional when they start due to the initial costs. Though spending a few hundred may be the smart thing to do because the last thing they want is to be stuck with a 3 million dollar tax bill that Markus Persson got from his little project called Minecraft (Although Sweden’s taxes are a bit higher than they are here).
A smart company would not only set up a corporation or LLC and pay themselves and their employees salaries, but they would also utilize the R&D credit for every year of development. The dollar for dollar tax credit allows the company to carry forward the credit they utilize each year of production and eventually use the credit to offset their net profits once the game is being sold.
Not only are these credits available to all video game devs, they also have access to a little known deduction called the domestic production deduction. This allows video game devs to deduct up to 9% of income earned from production activities that occur here in the US.
Enterprise Zone Credits
Now, this doesnt apply to everyone, but many states, including CA, NY, SC and FL (among some others), offer an EZ credit. This is a very complex credit, but can save a company thousands in taxes.
The combination of good accounting practices and sound use of tax credits can literally eliminate tax liability from sales of video games. I have worked with many companies virtually eliminating their liabilities using these techniques
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